CONSTRUCTION & MINING EQUIPMENT

INDUSTRY ASSESSMENT

Background

The U.S. construction and mining equipment industry is comprised of hundreds of firms, from small businesses to some of the world’s largest multinational corporations. Construction equipment is used for the construction of residential and nonresidential buildings, for surface and strip mining operations, for new power and manufacturing plants, for logging operations and for adding to or renovating infrastructure, such as sewage and water lines, roads, bridges and tunnels. Mining equipment firms produce machinery used in underground mining and minerals processing operations.

Machines built by the construction equipment industry are usually classified into ten types: backhoes; bulldozers; construction and surface mining rock drill bits; construction tractors and attachments; off-highway trucks; pile-driving equipment; portable crushing, pulverizing, and screening machinery; powered post hole digging machinery; motor graders and paving machinery; and surface mining machinery.

Machines built by the mining equipment industry consist of coal breakers, cutters and pulverizers; underground mining core drills; minerals processing machinery; mining cars; stationary rock crushing machinery; excavating machinery; and conveyor systems.

The construction equipment industry is classified under NAICS 33312 (Construction Machinery Manufacturing). The mining equipment industry is classified under NAICS 333131 (Mining Machinery and Equipment Manufacturing).

Industry Overview and Global Competitiveness

The construction and mining equipment industry is a very cyclical one, with high sales growth during boom years and reductions in output during economic slowdowns and downturns. The industry is affected particularly by such factors as housing starts, consumer confidence, prices for commodities, such as gold, silver copper, etc., and employment. Since residence and business construction is typically debt-financed, and since most of the industry’s products are big ticket items, interest rates and the availability of credit are important factors.

In 2007, the industry’s shipments were valued at $26.9 billion, up 77 percent from the 2003 level of $15.2 billion. The industry’s upward trend reflects increased demand in construction markets—including manufacturing and residential construction. The mining industry has also been re-energized with the upward trend of commodity prices.

The majority of the over 1,200 construction and mining equipment manufacturers in the United States are small or medium-sized and employ some 105,000 people. The bulk of the industry’s sales, however, are dominated by several very large multinational companies. Over recent years, there has been a constant restructuring of the industry. Scores of companies are either being acquired by some of the larger firms that are diversifying their product lines or are going out of business.

The United States is the world’s largest producer of construction and mining equipment. American companies are recognized worldwide as producers of high quality, state-of-the-art products. In 2008, total U.S. exports were $23.67 billion—reflecting an increase of 21.3 percent. Imports dropped in 2008 to $14.8 billion from their 2007 level of $15.26 billion (3 percent). Both imports and exports of construction and mining equipment have increased in recent years, reflecting increased worldwide demand triggered by increased spending on infrastructure development as well as a rise in commodity prices in the mining sector.

Over recent years, Canada, Australia, Mexico, Brazil, and Chile have been markets for U.S. exports of construction and mining equipment. Key sources for U.S. imports have been Japan, Germany, France, Italy, and Korea. Today, China is probably the most important potential market for construction equipment. Many industry professionals refer to China as the “world’s largest construction site.” Competition for the China market will be fierce. Quality, price, competitive financing, and after-sales-service will continue to be important factors for American companies and will determine ultimate success in China as well as in the international marketplace as a whole.

Foreign competition for construction and mining equipment markets is abundant and determined. Since most of the products produced are quite expensive, sales rely heavily on the best financing packages available. Japan, Germany and other European countries also manufacture high quality construction and mining equipment and compete with U.S. manufacturers not only in the United States, but all over the world. In many foreign markets, U.S. manufacturers remain the dominant suppliers of construction equipment. Market share percentages vary from country to country. However, in most instances, U.S. market shares have been declining to Japanese, German, and recently, Korean competition.

Domestic Environment

Currently, companies in the U.S. construction and mining equipment industry are facing much tougher times in 2009. The collapse of U.S. and worldwide financial markets, the tightening of credit by the international lending institutions and the worldwide economic recession will adversely affect this important industry sector.

H.R. 1, the American Recovery and Reinvestment Act of 2009, will help construction and mining equipment businesses survive these tough times and make the necessary investments for future growth. In addition to making the desperately needed investment in our Nation’s crumbling and inefficient infrastructure, H.R. 1 makes important adjustments to the tax code by allowing for bonus depreciation and 5-year carry back of net operating losses. Long-term extension of the renewable energy tax credit also will give existing businesses the tools to rebound and entrepreneurs the opportunities to flourish.

The U.S. construction and mining equipment industry has been for many years an international industry. Most U.S. manufacturers, especially the larger ones, maintain global supply chains, import some level of their components from foreign manufacturers, and manufacture a portion of their product lines in wholly-owned facilities all over the world. Most of these companies manufacture the smaller, lower priced products abroad, but continue to manufacture the higher-priced, more specialized products in U.S. manufacturing facilities. Most of the industry continues to perform engineering and other research and development processes in the United States. Acquisitions and mergers have been and will continue to be fairly commonplace, often involving foreign companies. U.S. companies are also increasingly investing in foreign companies or forming strategic partnerships to increase their competitiveness in foreign markets.

A major issue that affects the competitiveness of U.S. construction and mining equipment in the eyes of foreign competitors is the availability of competitive financing of U.S. construction equipment. Since most construction equipment is considered to be “big ticket” items, the availability of capital at competitive rates affects the purchase of U.S. construction and mining equipment–which is considered to be the best in the world--but also the most expensive in the world.

Other factors affecting the industry are the level of Congressional funding for the building and maintenance of the road system in the United States; international standards development; intellectual property rights protection; and the huge backlog in visa processing and the accompanying stringent requirements that often make it difficult for foreign customers (China in particular) to visit U.S. construction and mining equipment manufacturers and their manufacturing facilities to secure export sales. Included is the difficulty in obtaining visas to attend trade shows which are the key marketing events for the industry. Therefore, in many instances, foreign customers are content to purchase equivalent machinery from European, Japanese or other foreign construction and mining machinery manufacturers whose governments issue visas to business travelers in a timely manner.

Other issues of concern to the industry that ultimately affect the bottom line include the high costs of health care, tort litigation, intellectual property rights protection, environmental regulations, etc., and the availability of steel and its skyrocketing cost.

Trading Environment

The key export opportunities for U.S. construction and mining equipment manufacturers lie in emerging markets like China, Brazil, Russia, Eastern Europe, and India. Intense competition from European, Japanese, and Korean companies and a lack of capital for major infrastructure projects continue to be problems for U.S. manufacturers.

Export Financing

This industry has no problem creating a demand for its products. Every country, and virtually every project imaginable, needs high quality, highly productive construction equipment. The problem that most countries have in buying construction equipment is its high cost. It is widely reported that many foreign governments with globally competitive construction equipment industries more aggressively promote the sales of its companies than does the U.S. government.

These governments assist their companies by helping them offer financing terms to customers that are far more favorable than those offered by U.S. companies. It is often cited that Japanese and European construction and mining equipment manufacturers are able to offer more generous financing packages to their domestic and international customers. The favorable financial arrangements make the foreign products more attractive to customers.

Other obstacles to international trade in construction and mining equipment include:

Standards and Regulations

Most U.S. construction and mining equipment manufacturers view various types of standards and regulations required by foreign governments as unnecessary obstacles to trade. Environmental, noise and other safety standards and their associated costs make the already expensive U.S. equipment much more expensive. U.S. manufacturers are very much in favor of international standards and are working in the various international standards organizations to encourage standards that are fair for all and that establish a level playing field for all competitors.

Intellectual Property Rights

U.S. manufacturers are hesitant to license their technology, especially to firms in a country like China, unless said country vigorously enforces their IPR laws and their WTO obligations. A lack of enforcement of these laws makes it difficult and dangerous for U.S. manufacturers to market their products in countries that do not enforce the law.

The Association of Equipment Manufacturers (AEM) and the National Mining Association (NMA) are the leading U.S. trade associations representing manufacturers of construction and mining equipment and are two of the Department’s oldest and most valued client trade associations. Over the years, USDOC has done much to assist their members to enter key overseas markets.

AEM maintains an office in Beijing, China, which was established in 1997 assisted by a Market Development Cooperator Program (MDCP) grant from the Department of Commerce. A subsequent MDCP grant in 2000 established a Chinese language website to help U.S. construction equipment manufacturers advertise their products to potential Chinese customers. The 2000 MDCP grant also partially funded several trade missions to Latin America and the establishment of a U.S. pavilion at an important Brazilian construction equipment exhibition.

Historically, USDOC has worked closely with NMA on a variety of trade promotion projects including EXPOMIN in Chile and MINEXPO in Las Vegas through the International Buyer Program.

Len Heimowitz

202 482-0558

February 2009